Internationalization of the Renminbi: The Role of Trade Settlement

The renminbi is not yet an international currency that could challenge the position of the dollar or the euro, but it is heading in that direction. Chinese officials support the limited goal of increasing usage of the renminbi in international transactions, but they do not publicly advocate full reserve-currency status and free convertibility that such status would require. Yet international use of the renminbi is an important element of China's reform agenda. China has announced the opening of offshore renminbi centers in Hong Kong, Singapore, Taipei, London, Frankfurt, Paris, and Luxembourg, to the delight of offshore investors eager to invest in the renminbi, which has not depreciated significantly against the dollar since 1994 and is widely viewed as having further room for appreciation given China's strong economic fundamentals. The ability of Chinese exporters and importers to make and accept payments in renminbi is helping to drive the growth of offshore renminbi markets. The excess of settlements in renminbi by Chinese importers over renminbi settlement by Chinese exporters leads to growing volumes of renminbi deposits offshore. But the renminbi cannot become a true international currency until Chinese authorities drop their strict limits on capital flows between China and the rest of the world.

Data disclosure: The data underlying this analysis are available here[xlsx]. Proprietary data are available from Bloomberg.